No. of Recommendations: 17
Hello. This post discusses a free cash flow screen with a 12-month hold that since 1997 has a CAGR of 69 and a Sharpe Ratio of 1.38.

I haven't posted here in a while, but have been monitoring the board. Was very pleased to read that Fireballs has picked up the mantle from Brian Finney and Jack Cade.

Six months ago, in Message #112226, I commented on concerns then being raised about the PEG screens. My thought was, while PEG screens should perform well in the long run, that problems can arise because earnings depend on the machinations of corporate accountants. We all know of instances (e.g. PPD, Lernout & Hauspie, Enron) where accountants grossly distorted earnings figures.

I suggested that Free Cash Flow (FCFL) might be a more dependable substitute for earnings because it is a more difficult figure to manipulate, and posted a possible monthly screen.

Thanks to the comments of other posters, I took another look at the possibility that FCFL screens might be more applicable to longer holding periods. This coincided with my own nature which would prefer to invest in a few stocks once or twice a year rather than trading several on a monthly basis.

As a result, last summer I developed three new FCFL screens: one an annual and two semi-annuals. I've delayed writing about them until now as I wanted to to have a much information as possible prior to the January trade date. While the backtester only provides information on these screens since 1997, the fact that they have performed well in both bull and bear markets leads me to feel that they have some validity. This post deals with the annual screen, FCFLAN.


Note that FCFLAN has no RS component. The URL for this screen is:

The comparisons with the S&P are as follow:

                             FCFLAN               S&P

CAGR                           69                 10
GSD                           45                 19
Sharpe                       1.38               0.39

Winning Stocks             19
Avg. Gain                     76
Losing Stocks                 4
Avg. Loss                   - 50

1997                           65                 33
1998                           54                 29
1999                          151                 21
200                            27               - 9
2001                           73             - 13

A few comments on the reasoning behind the development.

1. I worked with TimeinessTM 2-2 because my past investing experience indicated that analysts raise stock ratings to the highest possible level only after superior performance for some period of time. My thought was that potentially successful longer term holdings (at least a year) may be more plentiful in the Timeliness 2 grouping.

2. The FCFL aspect is simply a sort with the 8 highest ranked ratios of FCFL per share divided by stock price, and then eliminating the highest ranking stock. For some reason the highest ranked stock always performed below the average in whatever permutations I tried.

3. The last step selects the 5 stocks with the lowest debt to capital ratios as of the last quarter.

I'll post the information on the two FCFL Semi-Annual Screens when I have some time tomorrow.

As always, any comments or thoughts are welcome.

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